A positive multi-asset stance despite 2025 risks

Macroeconomic conditions are by no means rosy as the year begins – with an international trade war looming and monetary policy still largely restrictive – yet our outlook for multi-asset funds is, on the whole, a positive one. Our main expectation is for a broad-based recovery with a substantial dose of risk and unevenly dispersed gains. 

Indeed, a recovery is already underway – as Figure 1 shows, growth signals have begun to trend upwards across economies. Inflation pressures have also started to build again. While there is plenty of variation, the overall direction of travel is fairly uniform across regions.  

FIG 1. Both growth and inflation nowcasting signals are beginning to trend upwards around the world¹

 Read also: Will rate moves threaten US growth?

Inflation pressures appear to be firming, but they have not reached the levels seen in 2021. We expect a growth recovery with a moderate level of inflation, which means that central banks should not rush to cut rates – rather, a slow pace of interest-rate reductions is likely to be the norm through 2025.  Such a scenario should create favourable environment for a diversified portfolio of bonds and equities, in our view. 

We see 2025’s recovery unfolding more quickly in some regions, notably in Europe, which is set to benefit from a rapid pace of rate cuts. We expect China to recover next, followed by the US. 

Adjusting to the context

Our All Roads multi-asset strategy adjusts its positioning to a changing risk backdrop according to a rules-based asset-allocation approach. The strategy’s exposure to defensive assets like nominal rates, real rates and long volatility varies to accord with different market conditions; during the inflation shocks of 2023, for example, the strategy reduced allocation to bonds and upped allocation to risk-on assets. The strategy is now moving back towards its historical average, which is a defensive tilt with 55% of the portfolio allocated to protection assets². 

The All Roads strategy was designed with stability, predictability and liquidity in mind. The strategy’s long-only, systematic approach aims to protect and grow client capital across market cycles, managing risk through a dynamic drawdown management methodology. We continually seek to improve our strategy by taking a scientific, yet pragmatic, approach to research. The strategy has undergone a number of improvements since inception, including new volatility methodologies, tail risk hedging and the integration of new overlays in areas such as valuation and short-term macro. 

Risks to watch

Needless to say, there are a number of risks accompanying the macro picture we have outlined above. 
One of the most significant is fiscal consolidation. Today, many countries are taking steps to reduce their primary deficits. But levels of public spending, of course, have not corresponded across the board over time. As Figure 2 illustrates, levels of fiscal largesse have been far greater in some countries than others – most notably the UK and the US. 

FIG 2. Primary deficit spending 2023 to 2025, with long-run deficit predictions³
 

Inflation pressures, in our view, seem the most vivid in precisely those countries that have seen the highest public expenditure in recent years – higher deficit spending (or fiscal expansion) has provided an economic tailwind during a period of tighter monetary policy and is now reflected in price increases. But as these countries move to reduce deficit spending, commensurate impacts on growth will be hard to avoid. Finally, an intensifying trade war involving the US could disrupt the global recovery path. 

Keeping an eye on tail risk

Across market conditions, multi-asset investors should remain conscious of the potential for tail risk. Extreme loss events are often associated with volatility spells, but they can occur even during periods of relative calm. And though participating in upside is a key focus for most investors, tail-risk mitigation may be even more important over the long term. As Figure 3 shows, for a hypothetical investment in the S&P 500 made in 1990, avoiding the 10 worst trading days for the index would have actually played a larger role in the health of the overall return than participating in the best days. 

FIG 3. Current value of investing USD 1 in the S&P 500 since 1990⁴

 
The All Roads strategy’s dynamic drawdown methodology systematically de-risks the portfolio in response to market signals and has successfully positioned the portfolio to avoid the six worst trading days of a standard multi-asset benchmark over the last 13 years⁵. 

As 2025 plays out, multi-asset investors should pay as much attention to downside risk as to the upside potential of regional recoveries.